An editorial blog of CFA Society Minnesota

The news in credit this week was dominated by the merger announcement between Comcast and Time Warner Cable – just in time for Valentine’s Day. Time Warner Cable bonds took a big hit last June, with spreads widening by about 150 basis points in response to romantic overtures from John Malone at Charter communications. Prices of TWC’s long bonds dropped by about 15-20 points, and have been languishing ever since on fears that Malone would prevail, and the company would lose its investment grade ratings. Comcast was an on-again, off-again suitor in this ménage a trois, and we wondered if they would ever take the relationship seriously. For credit investors who held onto, or took positions in TWC bonds during this drawn-out courtship, they finally got lucky. Immediately following the announcement of the all-stock deal, TWC bond spreads gapped about 125 basis points tighter, and the long bonds soared about 15 points. Not a bad one-day return for investment grade credit. One of the factors driving the deal seemed to be the desire on the part of management to pursue an all stock transaction, as it would help bondholders as well as stockholders. As creditors, we just aren’t used to seeing that kind of love.

Credit investors who held on during the January-end Emerging Market anxiety attack also got lucky, as spreads have tightened over the past week almost to the levels we saw before the mini-risk flare. Month-to-date excess returns are positive, and the long end is once again leading the way. We think part of the spread movement in secondary paper has been driven by a relatively light calendar, as the weather (and New York City weather in particular) continues to play an outsized role in our market. Taking out the Sovereign issuers, we were left with just $14 billion in supply, dominated by the bank sector with $4.25 of 3 year fixed and floaters out of JPMorgan, $2.75 billion 3 year floaters and 5 year fixed from Barclays, $1.75 billion 3 year fixed and floaters from Bank of America, and $2 billion from Cap One across 3 shorter duration tranches. If you did not want to buy short bank paper, you were definitely out of luck in new issue this week. Next week is looking better though – at this point there may be some pent-up supply, so we’re counting on at least $20 billion. If you’re willing to wait, you could get lucky.